Black Creek/Aetna Mountain TIF: Why it riles me & should rankle you

[A lawsuit in Hamilton County Chancery Court seeks to undo a rich vein of commercial government that favors a corporate developer. People interested in local economy and principled government might want to learn more about this case by a fair-minded and selfless claimant in the case, Helen Burns Sharp. Mrs. Sharp was a principal planner at the Tennessee State Planning Office for 16 years, was a county planner in Cobb County, Ga., for three years, was an Albany, Ore., community development director 18 years and is a member of the American Institute of Certified Planners. This Q&A about the case is from her website. — David Tulis]

Typically, local governments approve tax increment financing (TIF) for projects that either revitalize a blighted area or result in a significant number of permanent family wage jobs. This project does neither.

The lawsuit is also about transparency in government. It is a reminder to elected officials and their staff that what is required by state law and city code should be followed. It requests the Courts to address issues about access to public records and possible violations of the sunshine law. It challenges whether or not this project is even eligible for TIF funding under Tennessee Code Annotated § 7-53-101 (13).

2. How does this TIF project affect us as taxpayers and citizens?

When you and I pay our property taxes, the money goes into the general fund to help pay the cost of providing us with services like police, fire, street maintenance, trash pick up, etc. The new residents of Black Creek will pay taxes, but their tax dollars will be diverted to pay back the developers (with interest) for the cost of the road and sewer line to the top of Aetna Mountain. The TIF arrangement means that property owners from everywhere in Chattanooga except Black Creek will pay for services to new development at Black Creek for up to 20 years.

Tax revenue from the Black Creek area that would otherwise go to the general fund will go to the developers to pay for the road and sewer line. This diversion means less property tax revenue for other pressing and deferred needs all over town. This list includes priority items such as enhanced police protection and numerous needed street improvements.

Can you find the PUBLIC interest that justifies our $9 million gift to a New York hedge fund for this $500 million private residential development? Do we really want to be used as an ATM machine? The city and county also agreed to pay interest to the well-capitalized developers (prime +2—currently 5.25 %). They agreed to include in the taxpayer subsidy the developers’ $232,252 in legal fees related to the issuance of the TIF bond.

This lawsuit is now the only way to invalidate this unfortunate decision.

3. What is the status of the lawsuit?

The lawsuit was filed in Hamilton County Chancery Court on Feb. 28. The defendants are the three policy bodies that approved this TIF. Since that time, their attorneys have filed responses and motions and my attorneys have responded.

We are well into the “discovery” process, having served them with Requests for Admission, Interrogatories and Requests for Production. During the next few months, the discovery process will continue, including taking depositions.

In April the Industrial Development Board and the City filed a Motion to Dismiss the portion of my lawsuit that asserts that the TIF is unlawful. They argued that I lack standing to bring claims challenging the authority of TIF approval. In an Memorandum Opinion dated June 5, 2013, the Chancellor DENIED defendants’ Motion to Dismiss my claims relating to the IDB’s approval of the TIF. Chancellor Brown wrote that I met the required three tests for standing: (1) I have taxpayer status; (2) I allege a specific illegality in the expenditure of public funds; and (3) I made a prior demand on the government entities, asking them to correct the alleged illegality. I am very pleased that the Court is going to consider our petition relative to TIF approval.

The Chancellor granted the IDB and City’s Motion to Dismiss the portion of my lawsuit related to recent zoning decisions the City made at the bottom of Aetna Mountain. He said that the Court could not find that the zoning decisions are sufficiently related to the allegedly illegal expenditure of public funds (TIF) to give me taxpayer standing. I think this ruling actually focuses my case on what it is really about — the TIF.

While there is no way to know exactly when the Chancellor will issue an Opinion, the estimate is that it will be in late summer or early fall. Prior to the trial, each party will file a brief that outlines the arguments and evidence to be used at the trial. Because the case is in Chancery Court, it will be a “bench” trial, meaning it does not involve a jury and is decided by the judge (chancellor) alone.

4. What is the goal of the lawsuit?

The goal is that the TIF approvals for this project be declared null and void so that no taxpayer dollars are spent on this road and sewer line.

The hope is that our local governments will establish criteria for reviewing all future requests for public-private partnerships and that they will hold deliberations in the “sunshine.”

5. How can you help?

Financial contributions are needed to continue to pay the attorneys working on this case. I have already spent over $25,000 in legal fees and court costs. When I started following this case last summer, filing a lawsuit was the last thing on my mind. I had been involved with TIFs in my professional career as a community development director and think they can be a cool economic development tool. But the more I learned about this particular TIF project, the more concerns I had about the legality of the project and the integrity of the process. For several months, I requested the policy bodies to press the “pause button” in the approval process and hold a public hearing. Those requests fell on deaf ears. It was pretty clear that the train was on the track. Chattanooga has changed so much for the better since the time I grew up here. I didn’t want to believe that this project is representative of the “Chattanooga Way.”

My hope is that other people in the Chattanooga area who read this piece will also become disturbed by this clear misappropriation of taxpayer dollars and will donate to the legal challenge fund. It may take another $20,000 to reach the finish line. I have set up a separate bank account with the name of “Community Development Consulting.” This website provides a link to PayPal. If you want to send a check, the mailing address is 129 Walnut St., Unit 444, Chattanooga, TN 37403.

We all have a stake in tax equity and good government. The lawsuit sends a message to our elected and appointed officials that we want them to be good stewards of our tax dollars. It also tells them that we expect decisions affecting our tax dollars to be discussed at public meetings.

If we prevail in this lawsuit, it would affect how the city and county approach all the other requests for financial assistance that come their way in the future.

6. Who approved this taxpayer subsidy?

In 2012, the Industrial Development Board of the City of Chattanooga, the Chattanooga City Council, and the Hamilton County Commission approved tax increment financing for the Black Creek project.

7. What approval criteria were followed?

None. This is the first local TIF request. Each of the policy bodies made their decision without having established criteria or developing criteria to guide them.

8. What criteria are appropriate for tax incentives?

How the project is eligible under state law;
How it benefits the public, and
How it meets the “but for” test. (The “but for” test involves a demonstration that the project would not happen without the subsidy. Black Creek’s marketing materials referenced mountain “brow lots” a year before TIF approval.)

This project doesn’t seem to meet any of these criteria.

9. What is the significance of project eligibility?

To be eligible for TIF funding, the Economic Impact Plan (EIP) required by state law has to demonstrate that what the Developer proposes as economic impact meets the definition of “project” in the TIF statute in state law. Unless this threshold test is met, the TIF bonds would not be lawfully issued. Developers’ bond counsel acknowledged that a straight residential project would not meet this test.

Listed below are the details on the Black Creek project and the definition of project in state law. You don’t need to be a lawyer or a rocket scientist to wonder if the Black Creek project is what the Tennessee Legislature had in mind as “economic development” when they passed the TIF statute. Is this the kind of project that the City’s Industrial Development Board should issue bonds for?

In the EIP, Developers list the following retail and commercial projects they plan to construct to demonstrate economic impact:

An approximately 30,000 square foot town center, with retail and commercial space (about the size of the Whole Foods store);

An approximately 20,000 square foot corporate retreat and training center;

A resort lodge facility;

An area for an approximately 150,000 square foot office park;

An assisted living facility, *

and an approximately 10,000 square foot village center within the existing Black Creek development that will include retail and commercial space, a restaurant and ice cream parlor. *

Comments: * Denotes facilities to be located at the base of mountain which do not need the $9 million road and sewer and were in the advanced planning stage at the time of TIF approval. If the remaining project components were to be located on top of the mountain, it would require a change in zoning. How likely are the proposed retreat center and resort lodge? How many (or few) people would they likely employ? They don’t mention an office or an office park, but rather “an area” for an office park.

Contrast the Developers’ list above with these portions of the definition in Tennessee Code Annotated § 7-53-101 that their bond counsel points to for justifying eligibility: (13) “Project” means all or any part of, or any interest in: (A) Any land and building, including office building, any facility or other improvement on the land, and all real and personal properties deemed necessary in connection therewith, whether or not now in existence, that shall be suitable for the following or by any combination of two (2) or more thereof (ii) Any commercial enterprise in selling, providing, or handling any financial service or in storing, warehousing, distributing or selling any products of agriculture, mining or industry;(C) Pollution control facilities, coal gasification facilities, and energy production facilities. Pollution control facilities include waste water collecting systems and waste water treatment works.

Is there anything in their list of proposed “commercial” enterprises that seems to fit? Where are the commercial enterprises that are financial in nature or have anything to do with “agriculture, mining, or industry?” Do you think a residential sewer line should be considered a “pollution control facility”? A wastewater treatment plant is a facility. A sewer line isn’t a waste water collecting system. A system is a set of things forming a complex whole.

10. What did the policy makers NOT discuss in their deliberations before approving the TIF?

Does the proposed project meet the definition of “project” under state law?

Why were they not provided with a legible map showing the proposed road and sewer?

Why were they not provided with a map showing the proposed commercial facilities? (Most of the jobs referenced in the developer’s Economic Impact Plan (EIP) appear to be at the base of the mountain and thus do not need the new road and sewer line.)

Why they were not told how many permanent jobs would be created?

Why does the map in the EIP include land that is in Marion County?

Why it is OK to use a public taxpayer subsidy to subsidize facilities that are not open to the public? (One of the project components is a restaurant and banquet facility at the existing Black Creek Clubhouse, which is a private club.)

Why is the road is not being built as part of the normal subdivision process? (This process gives members of the public opportunities to ask questions and city staff the opportunity to require a geologic survey.)

Why was no information given on the geo-technical suitability of the proposed road? (Detailed soils maps available online suggest that this area has significant limitations for this use, including slope, large stones, depth to hard bedrock, and shrink-swell.)

Why was no information given on what it would cost for the city to maintain the road once it is built and turned over to the city? (It would likely be one of the most expensive roads in the city to maintain. Unlike the two roads up Lookout Mountain and Taft Highway up Signal Mountain, this road will not be a state highway. Unlike the “W” road up Signal, it is not in unincorporated Hamilton County and thus the county likely will not provide funding for the inevitable slides. The County recently estimated that repairing the slide problem on the W road will cost $1.3 million. )
How can the proposed new development on top of the mountain be approved from an emergency access perspective? (Both the International Fire Code and the city’s Subdivision Regulations require that developments with more than 200 units have at least two separate and approved fire access roads. The developers have projected far more than 200 new houses on top of the mountain. )

Why is it OK to allude to commercial facilities on top of the mountain when the zoning is R-1 (single-family residential)?

Why were officials not given a Memorandum of Understanding addressing how the public would be protected if the developers do not live up to their “economic development” obligations (jobs) and their representations at public meetings? (In this case, land donations for a school site and for conservation).

11. Why then did the City and County approve the tax subsidy?

They didn’t know what they didn’t know. It can be hard to come up with the correct answers if you don’t know the right questions.

City and county legal staff and planning staff failed to raise any of these issues at any of the public meetings. Apparently, they did not prepare written staff reports prior to the meetings or advocate for developing criteria prior to decision-making.

Members of the developer’s team lobbied policy makers prior to the public meetings in the spring of 2012 and made their case again at the public meetings. Officials were apparently persuaded by the developers’ argument that the area on top of the mountain would produce a substantial tax base after 20 years if development goes as planned. It is unlikely that the developers pointed out that the city probably would be spending more money every year from then on to provide services than it would receive in property taxes. Studies from throughout the country show that it costs more to provide services (police, fire, road maintenance, etc.) to a new suburban residential development than the city generally receives in property taxes. Maintenance of the road up the mountain likely will be especially expensive.

Once the public found out about this project from the newspaper, there were no public hearings before the County Commission or City Council where citizens could raise questions or express opinions.

12. What about public records and public meetings?

“Transparency” has never been this project’s middle name. It has been difficult to get access to public records and it has been difficult to find out what is on the agenda for public meetings. By their own admission, elected officials were approached by developers well before the public meetings in May/ June of 2012.

It was disappointing but not surprising that representatives of the Industrial Development Board met privately on February 14, 2013 to sign the loan documents. The IDB held a public meeting two days before. One might have hoped that they would take this action in the sunshine and explain why, four months after the question was raised at a public meeting, they had concluded that this was an eligible project under state law for the $9 million taxpayer subsidy.

13. What do local citizens who oppose this TIF project have against the Black Creek subdivision and its developers?

Nothing. Black Creek is an attractive, prestigious development and an asset to Chattanooga/Hamilton County. The local developers are successful businessmen. Since York Capital in New York apparently now has the controlling interest in Black Creek, its role further reinforces the question as to why our local property tax dollars should be used to repay that out-of-state group for the road and sewer improvements up Aetna Mountain.

14. Are opponents of this TIF against all so-called public-private partnerships?

No. However, many believe that requests for all TIFs and PILOTS (payment in lieu of taxes) should be evaluated on a case-by-case basis using appropriate criteria. These tax incentives can be valuable economic development tools when judiciously applied. This project, however, seems to be a classic example of a square peg in a round hole. It sets a bad precedent for Chattanooga and gives ammunition to opponents of all tax incentives.